Saturday, September 29, 2012

For the next 6 months I will be based at Hanoi, Vietnam. I will be capturing some of my experiences and reflections here in an occasional blogseries titled "An Indian in Indochina"

All modern nation-states require to construct a sense of identity and shared consciousness (of course, in a deeper sense, isn't all identity constructed?). Myth making, a historical revisionism and revivalism of a glorious past etc. are common ways that elites use to construct such a sense of national identity among the larger population.

In much of East Asia, the construction of national identity has also been animated by an impulse to resist the overwhelming and homogenizing influence of the historical hegemon of the region- China.

China looms large in the consciousness of the Vietnamese sense of identity. Nationalist myths, not only in modern Vietnam, but in their history over thousand years, involve stories of men and women standing up to Chinese imperialism. (read this fascinating story of a sisterhood of women generals defeating the Chinese http://en.wikipedia.org/wiki/Trung_Sisters )

The Vietnamese self-perception is of a hardy and proud people, spiritedly resisting the rapacious and brutal Chinese forces, relentlessly seeking to pummel them into submission.

Much of this is based on reality. In his deeply perceptive book- "When China Rules the World", Martin Jacques wrote about how China is not a conventional nation-state, but has a character of a "tributary state". A tributary state is an imperial power, which perceives itself to be a rightful hegemon, but which is content to allow local rulers to wield administrative power as long as they acknowledge its supremacy. In ancient China, the neighbors- Korea, Japan, Vietnam etc. used to explicitly acknowledge this by paying tribute to the Chinese emperor.

In many ways, this attitude seems to shape the conduct of Chinese foreign policy towards its neighbors even today. Indeed, Chinese accounts of the latest maritime disputes is bewilderment about the pesky tributaries not willingly accepting their status as inferior appendages of China, and having the temerity to stand-up to china instead.

The fascinating thing is that though the national identity in East Asian countries is constructed in opposition to China, there is an implicit and un-self conscious acknowledgement of the centrality of China to defining their sense of self.

Look no further than nomenclature for this. The Chinese name for China- "Zhongguo" - immodestly means "Center of the world". What is fascinating is that even the Japanese name for China- "Chuka Minkoku" also means "Center of the world" ! It's almost like the Japanese acknowledge the centrality of China. Similarly the Vietnamese also define themselves in relation to China- indeed the name Vietnam itself means "the south Viet" or "the land of Viets in the south", thus defining themselves in relation to their larger and more powerful neighbor.

It is this curious dualism that is fascinating- the influence of China on culture and identity is undeniable, but its "soft power" is outweighed by its malign and arrogant "hard power".

The most pithy quote to illustrate the modern Vietnamese identity toward China: In a conversation with a Vietnamese colleague I asked him if there was any residual anti-American feeling due to the Vietnam war. He replied "Now, we see the US as a potential ally. After all, we fought the US only for 20 years, and the French for only 200 years, but we have been resisting China for over 2000 years"!

Saturday, September 15, 2012

The Federal Reserve's move to undertake QE3 is one of the biggest intellectual and policy shifts in the field of economics.

In this post I try to explain the nature of the policy and how it will work, by using an analogy from a scene from South Indian superstar- Rajinikanth's most famous movie- "Baasha". Watch the total kvlt scene below (unfortunately could not get a clip with subtitles, but like several Rajini scenes you can figure out what's going on even if you don't speak the language)

So here's what happens in the scene: The girl (Rajinikanth's sister) goes to the owner of a medical college to seek admission. He then lewdly propositions her; she then goes crying to Rajinikanth, who joins her for the next meeting with the college owner.

When the guy still doesn't yield, Rajinikanth asks him if he can have a word with him alone. That's when he reveals himself to be "Baasha"- a renowned mafia don. Then you see the other guy abjectly surrendering, saying that Rajinikanth could not just have one seat in the college, but the entire college if he chooses to!

Notice that Rajinikanth does not actually have to do anything- he doesn't have to actually beat up the guy or even explicitly threaten him. In fact once he knows that it is "Baasha", the rational reaction is to give him whatever he wants without putting up a fight, since resistance would be a costly exercise in futility. Hell, it's Rajinikanth, who could win a fight with him!

Ben Bernanke's strategy to solve the unemployment crisis (based on a revolutionary new policy framework in economics called "market monetarism") is based on a similar idea.

In a recession of the kind that we see in the US now, the essential problem is a shortfall of demand- that people are not spending. This becomes a self-reinforcing cycle. As an example, if I own a cement factory, I will not produce much during a recession since people are not constructing homes; because I am not producing cement I don't employ too many people in my factory- leading to unemployment; this unemployment means people do not have enough money and hence will not construct homes, which means I will not produce cement, hence the cycle continues.

Hence we get stuck in a recession because people in the market have low expectations of demand. When people act as if there will be low demand, it becomes a self-fulfilling prophecy.

So what can we do to change people future expectations of demand?

Well the only entity that can do so is the Federal Reserve- an entity which is nearly as powerful as Rajinikanth!

Here's how it works.

Step 1: The Federal Reserve explicitly lays out its goal. Here the goal is to grow the economy by a certain rate to ensure that unemployment reduces (just as Rajinikanth makes it clear that he really really wants that medical seat)

Step 2: The Federal Reserve then hints at what it will do if the goal is not reached. In Rajinikanth's case the hint was that he would beat up the guy, in the Fed's case it is that they would 'print money' to buy mortgage backed securities to lower long term interest rates to encourage spending

Remember the Federal Reserve has unlimited power to print money, just as Rajinikanth has unlimited power to beat people up. Resistance is futile, you might as well expect that the superpower will achieve what he/it wants and behave accordingly.

Then the superpower doesn't even have to carry on it's threat! Rajinikanth does not actually have to beat up the guy...the Federal Reserve did not buy a single mortgage backed security, yet stock prices still went up!

The reason is that the cement manufacturer now knows that he may as well accept the fact that we are going to have higher demand. This is because if the Federal Reserve does not get the demand it wants in the economy, it is going to print money and buy cement itself! (albeit indirectly). The Fed can print enough money to buy over the whole world- so it's a credible promise/threat that it will increase demand

Given that there is going to cement demand in the country it's the rational thing for me to produce cement; which means I will employ people in my factory; which means they will have money to spend, which means they will construct homes, which means that I need to produce cement. The hitherto negative spiral is converted to a positive one. The market acts as if the monetary infusion has already taken place, and then the monetary infusion is hardly required! (hence the name 'market monetarism')

Never take on Rajinikanth. Never take on the Fed. Assume that they will get what they want, and change your behavior accordingly, resistance is futile.

Why I find this appealing than fiscal stimulus (i.e. the Government spending to increase demand in the economy), apart from grounds of economic ideology (which is that it involves Government interference in the economy which as a libertarian I am opposed to) , is it's beautiful aesthetic symmetry. Recessions are caused due to low expectations, hence what you need to do is to change expectations. Fiscal stimulus means you have to actually interfere, a 'market monetary' stimulus involves just credibly promising/threatening to interfere, that's enough to change expectations.

Market monetarism started as an idea proposed by a few intrepid bloggers- Scott Sumner, David Beckworth, Nick Rowe etc. and has now become Fed policy. We are witnessing one of the most consequential shifts in how we conceptualise the roles of institutions such as the Fed in the economy. These ideas require to be understood and popularised in the wider public so that we have more public discourse about these policies.